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LETTER  FROM  PRESIDENT  WILLIAM  H.  TAFT 
TO  THE  GOVERNORS  OF  THE  STATES 

ON 

LAND  AND  AGRICULTURAL  CREDIT 
IN  EUROPE. 


WASHINGTON  :  GOVERNMENT  PRINTING  OFFICE  :  1912 


*5  r 5  *\-Z.  6' 

\ 


October  io,  1919 

DIVISION  OF  INFORMATION 
Department  of  State 


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LETTER  FROM  PRESIDENT  WILLIAM  H.  TAFT  TO  THE 
GOVERNORS  OF  THE  STATES. 

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Executive  Offices, 

Beverly ,  Mass . ,  October  n ,  1912. 


My  Dear  Governor  - : 

For  some  months  past,  at  my  direction,  the  Department  of  State, 
through  its  diplomatic  officers  in  Europe,  has  been  engaged  in  an 
investigation  of  the  agricultural  credit  systems  in  operation  in  cer¬ 
tain  of  the  European  countries.  Although  the  investigation  is  still 
under  way,  a  preliminary  report  has  been  submitted,  together  with 
the  recommendations  of  Ambassador  Myron  T.  Herrick  in  connection 
with  my  proposal  to  adopt  this  system  in  the  United  States. 

A  study  of  these  reports  and  of  the  recommendations  of  Ambas¬ 
sador  Herrick,  which  I  am  sending  you,  convinces  me  of  the  adapta¬ 
bility  to  American  conditions  of  the  cooperative-credit  plan  as  set 
forth  in  the  organization  of  the  Raiffeisen  banks  of  Germany.  The 
establishment  and  conduct  of  such  banks,  however,  are  matters  for 
State  control.  I  suggest,  also,  the  establishment  of  land-mortgage 
banks  under  State  charters  and  the  formation  of  cooperative  mort¬ 
gage-bond  societies  along  the  lines  of  the  Landschaften  societies  of 
Germany,  provided  that  uniform  State  legislation  can  be  secured  to 
govern  their  organization  and  operation.  As  a  later  step  I  favor  the 
enactment  of  laws  by  Congress  permitting  the  organization  of 
national  land-mortgage  banks,  to  be  operated  under  strict  Govern¬ 
ment  supervision,  with  the  power  to  guarantee  and  market  the  guar¬ 
anteed  debenture  bonds  of  the  State  land-mortgage  banks  or  cooper- 
•ative  societies.  I  recommend  for  your  consideration  the  leport  and 
recommendations  of  Ambassador  Herrick,  now  published  by  the 
Department  of  State  for  general  distribution.  This  report  should 
receive  the  attention  of  everyone  interested  in  the  problem  of  agri¬ 
cultural  finance  and,  indeed,  of  all  persons  interested  in  the  welfare 
of  the  American  farmer. 

The  need  for  the  establishment  of  an  adequate  financial  system 
u  as  an  aid  to  the  farmers  of  this  country  is  now  quite  generally 

r  recognized.  The  governmental  initiative,  taken  by  the  Depart- 

d  ment  of  State  under  instructions  issued  by  my  direction  to  the 
diplomatic  officers  in  Europe  on  March  18  last,  have  been  effec¬ 
tively  supplemented  by  the  American  Bankers  Association,  the 
Southern  Commercial  Congress,  and  by  many  other  bodies  by  whom 
this  question  has  been  agitated,  and  valuable  work  has  been  done  in 


(3) 


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studying  and  disseminating  knowledge  of  those  great  instrumentali¬ 
ties  which  have  been  created  in  foreign  lands  to  extend  to  their  agri¬ 
culturists  credit  facilities  equal  in  benefits  to  those  enjoyed  by  their 
industrial  and  commercial  organizations.  The  handicap  placed 
upon  the  American  farmer  through  the  lack  of  such  a  system  and 
the  loss  sustained  by  the  whole  citizenship  of  the  nation  because  of 
this  failure  to  assist  the  farmers  to  the  utmost  development  of  our 
agricultural  resources  is  readily  apparent. 

The  twelve  millions  of  farmers  of  the  United  States  add  each 
year  to  the  national  wealth  $8, 400, 000,000.  They  are  doing  this  on 
a  borrowed  capital  of  $6,040,000,000.  On  this  sum  they  pay  an¬ 
nually  interest  charges  of  $510,000,000.  Counting  commissions  and 
renewal  charges,  the  interest  rate  paid  by  the  farmer  of  this  coun¬ 
try  is  averaged  at  per  cent,  as  compared  to  a  rate  of  4^  to  3% 
per  cent  paid  by  the  farmer,  for  instance,  of  France  or  Germany. 

Again,  the  interest  rate  paid  by  the  American  farmer  is  consid? 
erably  higher  than  that  paid  by  our  industrial  corporations,  rail¬ 
roads,  or  municipalities.  Yet,  I  think,  it  will  be  admitted  that  the 
security  offered  by  the  farmer  in  his  farm  lands  is  quite  as  sound  as 
that  offered  by  industrial  corporations.  Why,  then,  will  not  the 
investor  furnish  the  farmer  with  money  at  as  advantageous  rates 
as  he  is  willing  to  supply  it  to  the  industrial  corporations?  Obvi¬ 
ously,  the  advantage  enjoyed  by  the  industrial  corporation  lies  in 
the  financial  machinery  at  its  command,  which  permits  it  to  place 
its  offer  before  the  investor  in  a  more  attractive  and  more  readily 
negotiable  form.  The  farmer  lacks  this  machinery,  and,  lacking  it, 
he  suffers  unreasonably.  This  is  not  theory.  Through  all  the 
changing  conditions  of  a  century  the  soundness  and  practicability  of 
such  financial  machinery,  based  upon  the  peculiar  credit  needs  of 
the  agriculturist,  has  been  tried  out,  and  so  successful  has  been  its 
operation  that  in  Germany,  in  times  of  financial  stress,  money  has 
been  taken  out  of  the  commercial  field  and  placed  in  the  keeping  of 
that  Empire’s  agricultural  cooperative  banks  for  safety.  The  value 
of  this  assistance  to  the  farmer  receives  unquestionable  testimonial 
in  the  growth  of  the  system  in  the  countries  of  Europe.  More 
specifically  this  advantage  may  be  seen  in  the  fact  that  through  this 
machinery  the  German  farmer  has  received  money,  at  times,  at  rates 
lower  than  those  current  in  commercial  loans. 

But  the  advantages  to  be  gained  by  the  adoption  of  this  plan  go 
beyond  the  direct  saving  in  interest  charges  to  the  farmer.  The 
great  necessity  which  prompted  the  establishment  and  extension 
of  this  plan  throughout  Europe  was  that  of  checking  the  rapidly 
advancing  increases  in  the  cost  of  foodstuffs,  brought  about  by  the 
inevitable  increase  in  consumption  and  the  failure  of  the  long- 


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drained  soil  to  afford  a  corresponding  increase  in  production.  That 
problem  faces  the  people  of  this  country  to-day — not  in  so  severe  a 
form  as  it  threatened  the  older  countries  of  Europe,  but,  still,  as  a 
great  and  pressing  economic  problem. 

In  Europe  this  problem  has  bee#  successfully  met,  first,  by  re¬ 
ducing  the  cost  to  the  farmer  of  producing  his  crops  and,  secondly, 
by  increasing  his  production  through  the  adoption  of  improved 
methods  of  cultivation.  Both  the  Federal  and  State  Governments 
in  this  country  have  done  much  to  afford  the  farmers  instruction  in 
improved  agricultural  methods.  But  it  still  remains  for  us  to  reduce 
the  cost  of  the  farmer’s  production  by  affording  him  the  necessary 
capital  for  the  exploitation  of  his  soil  upon  the  most  advantageous 
terms.  He  must  be  afforded  the  money  necessary  for  him  to  adopt 
improved  methods.  It  must  be  made  profitable  for  him  to  place 
every  acre  of  his  ground  under  cultivation.  This  offers  the  con¬ 
sumer  relief  from  the  increasing  cost  of  foodstuffs. 

It  is  this  portion  of  the  task  that  still  remains  to  be  performed  in 
this  country,  and  it  is  in  this  task  that  I  invite  your  cooperation. 

The  country  enjoys  to-day  great  prosperity.  The  factories  are 
busy,  the  workingmen  employed,  and  everywhere  the  wheels  of 
industry  hum.  The  farmer  shares  in  this  general  prosperity.  We 
have  come  to  look  upon  the  farmer  of  to-day  as  one  of  our  most  pros¬ 
perous  citizens.  The  proposal  which  I  make  is  not  to  subsidize  the 
American  farmer.  Fortunately  for  this  country  he  does  not  need 
it,  nor  would  he  accept  it.  What  this  plan  offers  is  a  means  to 
secure  to  this  country  greater  productivity,  at  less  cost,  from  the 
farms  that  are  now  under  cultivation,  and,  above  all,  to  give  us  more 
farms  and  more  farmers.  It  will  make  it  profitable  for  the  farmer 
to  return  to  the  cultivation  of  the  abandoned  farms  of  the  East  and 
to  open  up  the  vast  areas  of  untilled  land  in  the  West. 

All  this  can  be  done,  and  I  am  convinced  that  in  this  country  it 
must  be  done,  by  the  efforts  of  the  farmer  himself.  It  is  natural  that 
some  of  the  European  governments  should  have  extended  a  paternal 
protection  over  the  systems  of  agricultural  finance  and  to  have  given 
them  financial  as  well  as  legal  assistance.  This,  however,  must  be 
guarded  against  in  this  country.  We  must  establish  a  credit  system 
of,  for,  and  by  the  farmers  of  the  United  States.  It  were  better, 
otherwise,  not  to  consider  the  matter  at  all.  It  is  an  interesting 
commentary  on  the  value  of  paternalistic  governmental  support  to 
note  that  this  plan  of  agricultural  cooperative  credit  has  thrived 
best — in  fact,  has  enjoyed  a  substantial  development  only — in  those 
countries  where  the  movement  has  grown  up  from  the  farmers  and 
where  the  government  has  to  the  greatest  degree  refrained  from 
attempts  artificially  to  nurture  the  plan  by  subsidy  and  has  restrained 


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its  interference  to  the  proper  field  of  imposing  restrictional  legisla¬ 
tion  for  the  purpose  of  preventing  speculation. 

The  entire  field  of  agricultural  cooperative  credit  is  properly 
divisible  into  two  parts:  First,  the  cooperative  societies  of  farmers, 
formed  for  the  purpose  ofj,  obtaining  personal  credit;  and,  secondly, 
the  societies  or  private  corporations  formed  to  create  a  sound  security 
in  land  mortgages  for  the  purpose  of  gaining  a  national  or  interna¬ 
tional  market  for  bonds  based  upon  farm-land  mortgages.  Both  of 
these  forms  of  cooperative  credit  may  be  found  in  many  of  the 
European  countries  under  varying  forms  of  organization.  The  gen¬ 
eral  principles,  however,  are  very  much  the  same. 

It  is  not  practicable  here  to  go  into  the  details  of  the  organiza¬ 
tion  followed  in  European  countries  in  the  formation  of  these  coopera¬ 
tive  societies.  A  very  good  law  has  been  enacted  by  the  State  of 
Massachusetts  allowing  the  incorporation  of  credit  unions,  which 
should  furnish  an  excellent  example  for  other  States.  Their  estab¬ 
lishment  is  generally  a  matter  for  State  legislation  and  encourage¬ 
ment,  their  organization  and  management  are  wonderfully  simple, 
and  the  experience  of  the  European  countries  shows  that  their  suc¬ 
cess  is  practically  inevitable  where  the  environment  is  congenial  to 
their  growth  and  where  proper  laws  are  passed  for  their  conduct. 
Although  undoubtedly  the  organization  followed  in  the  European 
countries  could  not  be  adopted  in  its  entirety  in  this  country,  I 
would  advocate  the  general  principles  followed  by  the  so-called 
Raiffeisen  banks  of  Germany.  These  smaller  societies  should 
restrict  their  loans  to  personal  credit.  They  are  not  intended  to 
make  large  loans  on  land  mortgages,  although,  indirectly,  the  lands 
of  all  the  members  form  the  security.  Above  all,  the  cardinal  prin¬ 
ciple  should  be  followed  that  all  money  loaned  should  be  for  a 
strictly  creative  purpose.  No  loan  for  the  purchase  of  anything 
merely  for  consumption  should  be  tolerated. 

The  business  of  furnishing  money  as  loans  on  real  estate  is  the 
proper  province  of  the  cooperative  societies  or  private  corporations, 
which  I  have  placed  in  the  second  class.  In  Germany  this  is  done 
through  cooperative  societies  known  as  Landschaften  and  through 
mortgage  banks.  In  France  it  is  done  through  the  Credit  Foncier. 

The  chief  advantages  brought  to  farmers  through  such  institu¬ 
tions  are  lower  interest  rates  and  easy  amortization,  whereby  the 
borrowing  farmer  may  repay  his  loan  bit  by  bit,  extending  these 
payments  over  a  long  number  of  years.  Thus,  his  obligations  are 
made  proportionate  to  his  annual  receipts  from  the  exploitation  of 
his  soil,  and  the  danger  of  foreclosure  is  vastly  reduced.  To  ap¬ 
preciate  what  this  amortization  plan  would  mean  to  the  farmers  of 
this  country,  it  is  only  necessary  to  consider  the  foreclosure  records 
of  some  of  our  States. 


7 


It  is  not  my  purpose  here  to  lay  down  any  one  plan  as  necessarily 
the  one  most  suitable  for  adoption  in  the  United  States.  From  the 
reports  of  our  ambassadors  and  ministers  in  Europe  and  from  the 
recommendations  of  Ambassador  Herrick,  to  whom  was  given  the 
task  of  compiling  from  these  the  general  ^report,  I  am  inclined  to 
suggest  the  suitability  of  organizations  similar  to  the  German  land- 
mortgage  bank's  for  incorporation  understate  charters  in  this  coun¬ 
try.  It  will  be  most  desirable,  if  not,  indeed,  essential,  that  the 
laws  creating  and  governing  such  institutions  should  be  uniform 
throughout  the  States,  in  order  that  they  might  be  well  understood 
by  the  investor,  and  their  debentures  should  be  given  character  both 
at  home  and  abroad.  As  a  later  step  it  may  prove  advisable  to  urge 
the  enactment  by  Congress  of  laws  permitting  the  creation  of  national 
land-mortgage  banks  similar  to  those  of  Germany  and  France,  with 
limited  privileges,  and  surrounded  and  guarded  by  strict  supervision, 
but  with  sufficient  appeal  to  American  initiative  and  opportunity, 
with  the  power  to  guarantee  and  market  a  guaranteed  debenture 
bond  of  the  State  mortgage  bank  or  cooperative  society.  Securities 
issued  by  such  national  institutions  would  probably  find  a  ready 
market  in  Europe  at  low  rates  of  interest,  since  they  are  a  favorite 
and  familiar  form  of  investment  in  those  countries  by  the  conserva¬ 
tive  investor. 

The  most  essential  point  to  bear  in  mind  is  the  need  for  the 
assumption  by  the  Federal  and  State  Government  of  the  responsi¬ 
bility  for  economically  and  honestly  conducted  institutions.  Such 
assumption  is  the  essential  precedent  for  obtaining  the  confidence 
of  the  American  as  well  as  the  European  investing  public.  In  this 
field,  as  in  all  others,  there  is  room  for  harmful  exploitation  for  per¬ 
sonal  gain.  That  must  be  guarded  against.  Therefore,  I  invite  you 
to  make  this  matter  the  subject  of  earnest  study  and  exchange  of 
views  between  the  State  Executives,  and  I  now  extend  to  you,  with 
the  Governors  of  the  other  States,  a  cordial  invitation  to  confer  with 
me  in  Washington,  on  the  occasion  of  the  next  annual  conference  of 
Governors,  in  order  to  consider  means  for  the  adoption  of  an  agri¬ 
cultural  credit  system  as  a  benefit  to  the  American  farmer.  I  under¬ 
stand  that  the  Congress  of  Governors  is  to  occur  in  December. 
Were  not  the  interval  so  short,  my  conviction  of  the  importance  of 
this  subject  would  impel  me  to  invite  you  to  a  special  conference  at 
a  still  earlier  date. 

Renewing  my  request  for  your  hearty  cooperation  in  a  work  of 
such  nation-wide  benefit  to  the  farmer,  the  consumer,  and,  indeed 

to  the  nation  at  large, 

I  am,  my  dear  Governor,  very  sincerly  yours, 

Wm.  H.  Taft. 


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